1. Field of the Invention
This invention relates to electronic commerce across a communications network such as the Internet and, more particularly, to the facilitation of transactions between buyers and sellers in a communications environment, such as the World Wide Web. Aspects of the invention relate to the conduct of an automated auction, market-making and person-to-person (“P2P”) electronic commerce.
2. Background Information
A number of auction formats are well known in the fields of auction theory and internet commerce, as will be discussed in more detail below.
The simplest auction situation that is studied in the art consists of a single seller, with a single item for sale, who must design a mechanism optimally to sell that item to one of many (“n”) bidders. Many different auction formats can be used in this situation, of which four are paradigmatic. The most well known and widely used is the “English”, or ascending auction, in which the bidding level is progressively raised (either by the bidders themselves in the case of an “outcry” auction, or by an electronic clock in the “Japanese” English auction) until just one bidder remains, who then pays her bid for the item. In the “Dutch”, or descending auction, the bidding level starts very high and is progressively lowered (typically by an electronic clock) until someone bids, and that bidder pays the current level for the item. In the first-price sealed-bid auction, prospective buyers have a single chance to bid, and the seller sells the item to the high bidder for the amount she bid. Finally, in the second-price sealed-bid, or “Vickrey” auction (Vickrey, 1961), the seller again sells the item to the high bidder, but for the amount of the second highest bid.
These formats each have strengths and weaknesses, and which is best typically depends on the nature of the item, the nature of bidders' information about the item, the seller's and buyers' risk preferences, and implementability issues, such as transaction costs, political pressures, ease of understanding, whether bidders might be able to collude or deter entry, and whether the seller can credibly commit to the rules of the game.
Sellers can often use reserve prices to set a minimum amount for which they will sell their item. Reserve prices can be revealed to buyers, or can be kept hidden from buyers (in which case they only find out ex post whether the reserve has been met) depending on the circumstances. The functional opposite of the reserve price is known as the “Buy Price”. Buy prices are the auction formalization of notices like “$50 or best offer” which often appear in yardsales or classified advertisements. The winner is the first bidder to bid the buy price, or, if none, the otherwise highest bidder (assuming such bid is above the reserve price, if any).
Another auction situation studied in the art is the procurement auction, in which there is a single buyer of some item and many (“n”) potential sellers (e.g. a B2B sourcing auction). This auction situation is theoretically analogous to the first, and many of the same formats and techniques are applied to its study and usage.
Another auction situation studied in the art is the case of a single seller, selling multiple items (“k”) to many buyers (“n”). If the k items are identical (“homogeneous”), and buyers have unit demand (i.e. want just one item each), then the auction situation is theoretically quite similar to the first. More complicated is when the items are not identical (“heterogeneous”), and/or when they might be complements or substitutes for the buyers (who will not generally have unit demand). In such case, auctioning the items individually is potentially problematic, both in terms of revenue generation for the seller, and efficient allocation of resources for society. Instead, it is generally thought best to auction the items simultaneously.
A simultaneous ascending auction consists of k individual ascending auctions, but with the stipulation that all of the auctions end simultaneously, when in some round no bid is received in any auction.
Another possibility is the package auction, in which bidders bid on one or more “packages” of items, either in sealed-bids or in an ascending auction setting. This is an area of active research, because of its importance in a wide variety of high-stakes applications.
Another auction situation studied in the art is the case of many sellers (“m”) selling one or more of a homogeneous item to many buyers (“n”). This situation typically calls for a double auction, in which both buyers and sellers submit bids, and trade occurs at a single market-clearing price. Determining this price is non-trivial: in the case where buyers and sellers each submit a bid si for the trade of a single unit of the good (buyers bid a maximum willing-to-pay, sellers a minimum willing-to-accept), then any price between the mth and m+1th highest bids (s(m) and s(m+1), respectively) inclusive will clear the market. A “k-double auction” specifies a parameter k between 0 and 1 inclusive that determines which market clearing price is selected (specifically, p=(1−k)s(m)+ks(m+1)). The choice of parameter impacts the strategies of the buyers and sellers. The k-double auction is a model of a “call market,” e.g. the setting of the daily opening price of each stock on the New York Stock Exchange.
It should be noted that the opening trading of each stock in the NYSE constitutes a separate, homogeneous item, double auction. (Trading after the opening is more difficult to model because of arrival and timing issues, but is related to a homogeneous item double auction). A buyer who wants to buy shares, for example, in Microsoft or Intel, but not both (e.g. because of budget-restrictions or transaction-cost efficiency reasons), must solve a complex optimization problem across multiple auctions. One solution may be to bid at an aggressive level for both, and then, as soon as one bid is successful, withdraw the other. But this strategy exposes the bidder to risk that either no trade is consummated, or both (if the timing is coincident).
Double auctions for heterogeneous items have not thus far been studied in the art. Note that if the many sellers could collectively hire an intermediary, who would then auction their items simultaneously to the buyers, we would be in the single-seller-n-buyers framework discussed above, and a mechanism such as the simultaneous ascending auction would perform well in terms of both revenue generation for the sellers and allocative efficiency for the buyers.
It is an object of the present invention to provide a double auction-like mechanism for heterogeneous items. Double auctions for heterogeneous items are of particular interest in situations whereby the above-mentioned intermediation is difficult or impossible. Person-to-person internet commerce is one such market where intermediation is difficult, and other examples are given later.